Chinese investors snapping up London's skyscrapers

INTERNATIONAL - Chinese investment in London commercial property has more than trebled since before Britain voted to leave the EU, most of it channelled through Hong Kong at a time of heightened political uncertainty in the former British colony.

While others have pulled back from British property following last year’s Brexit referendum, investors largely from Hong Kong are snapping up the British capital’s best-known skyscrapers, including the “Cheesegrater” and the “Walkie Talkie”.

In the first six months of this year, Chinese investors spent £3.96billion (R67bn) on London commercial property, according to data from the CBRE real estate group, the highest amount on record and outpacing the £2.69bn spent in the whole of last year. Hong Kong accounted for 92percent of the Chinese investment, according to the Knight Frank agency.

Hong Kong food conglomerate Lee Kum Kee is set to pay £1.28bn later this month for 20 Fenchurch Street - the 34-storey skyscraper known as the Walkie Talkie - a record for an office building in Britain. With Beijing cracking down on foreign deals by mainland companies, investors there are using Hong Kong as a conduit for overseas deals. China’s state planner announced on Friday that the country would strengthen rules to defuse risks for domestic companies investing abroad and curb “irrational” overseas investment.

However, Hong Kong-based investors were more significant players. “Deals from mainland China already make up a smaller proportion of the activity from the region, with Hong Kong investors most active,” said Anthony Duggan, the head of capital markets research at Knight Frank. “We expect that Chinese investors will still look to make strategic real estate purchases that fit their business plans.”

Hong Kong’s freedoms, including judicial independence, are constitutionally enshrined under a “one country, two systems” deal struck before Britain returned the territory to China in 1997. However, concerns have been rising in recent years and an appeals court jailed three leaders of Hong Kong’s democracy movement last week.

Tens of thousands protested in Hong Kong on Sunday against the jailing of the young activists, with many demonstrators questioning the independence of the judiciary. Hong Kong’s legal chief has denied any “political motive” in seeking the prison terms.

Taking control

“If you’re concerned that China is taking control of Hong Kong more and more and you need to take capital out of that jurisdiction, London is attractive,” said Chris Brett, the head of international capital markets at CBRE.

Several factors are drawing the investment, including sterling’s 12percent drop against the US dollar since the Brexit referendum - to which the Hong Kong dollar is pegged.

“Cheaper money, the rule of law, cultural familiarity, and a need to diversify out of a home market is what’s driving Hong Kong demand in the UK,” said James Beckham, the head of central London investment at property consultant Cushman & Wakefield, which advised the Walkie Talkie’s buyers and the Cheesegrater’s sellers.

Record Hong Kong commercial and residential property prices, together with political concerns, were pushing investors to turn to overseas markets where rental yields were higher.

The illiquidity of a building compared with other investments was also an attraction, if Beijing demanded that funds be repatriated to China, Jefferies analyst Mike Prew said.

The Brexit vote means some London-based financial jobs will shift to the continent or Ireland, so that banks can continue selling to clients in the EU. But this negative factor for the office market is offset by the pound’s fall, which makes property cheaper for foreign investors, and the fact that the buildings sold have come with tenants signed up to leases of about 10 to 15 years.

Real estate sources said other City of London landmarks, including 30 St Mary Axe - known as the Gherkin - and the Heron Tower, were also attracting interest from Hong Kong investors. These prime “trophy” assets have well-known tenants and were in limited supply.

Chinese pricing of UK commercial real estate has already established an “entry premium” of about 100 basis points on yields for platinum- or top-grade buildings, according to Prew.

One third Capital from China and Hong Kong has accounted for a third of all investment in London commercial real estate this year, up from less than 10percent before the referendum, according to CBRE. This stands in contrast to other investors. Money raised by UK property-focused private equity funds has fallen since the Brexit vote, with $2.9bn (R49bn) raised in the first half of this year, compared with $3.7bn a year earlier, according to data from Prequin.

That’s as the outlook for the London office market as a whole clouds before Britain’s EU exit in 2019. The amount of empty space has jumped since the referendum, with developers having to offer longer rent-free periods and lease breaks early into leases to secure tenants.

The largest chunk of cross-border Chinese real estate investment continues to be poured into the US, but that proportion declined in the first half of the year while increasing in Britain.

Higher rents

Buildings in London are cheaper per square metre than in Hong Kong, Tokyo, New York and San Francisco, but they offer higher rents than most other global centres of their stature, according to Knight Frank data.

“(Chinese investors) want stable and good returns, and trophy buildings generally look part of that,” said Dan Norris, the real estate head at Hogan Lovells, the second-largest law firm in China.

Norris helped Chinese buyers in May to buy 20 Gresham Street, a seven-floor building near St Paul’s Cathedral, for about £300million.

Asian investors were choosing to avoid development deals, because they remained wary of riskier projects and were most keen on London offices, he added.

Sales of trophy assets have been a prominent feature of the central London deal market for the past six months, resulting in 29 transactions of more than £100m, up from 19 a year ago, according to data from BNP Paribas Real Estate.

The most recently sold skyscrapers were also cheaper than the same calibre of building in Hong Kong: CBRE data showed rental yields at about 3.4 to 3.5percent for a top-tier London building versus 1percent for a similar one in Hong Kong.